Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Bond ETF discounts during recent periods of Volatility

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Rich Powers, Vanguard head of ETF product management

By Rich Powers and Scott Johnston, Vanguard Americas

(Sponsor Content)

The waves of volatility from the coronavirus outbreak have reached every corner of the financial markets. For bond ETFs, the waves have resulted in both volatile market price swings and larger-than-usual gaps between market prices and net asset values (NAVs).

When the gap is positive (that is, when the market price is greater than the NAV), it’s called a premium. A discount occurs when the NAV is greater than the market price. While such gaps can be unsettling, history shows that premiums or discounts are always present with bond ETFs, and their widening amid market volatility tends to be short-lived.

Bond ETFs are an important source of liquidity

Along with heightened market volatility in the bond market over the last few weeks, there’s been a drop in liquidity of many types of individual bonds: that is, the willingness of market participants to buy and sell. Bond ETFs, on the other hand, have maintained their liquidity and have been the primary mechanism for price discovery in the fixed income markets.

In such a volatile environment, bond ETFs can be expected to trade at discounts or premiums. Though discounts and premiums of this breadth and magnitude are rare, bond ETFs have been tested during prior bouts of volatility and actually do a good job of reflecting in real time the value of the underlying fixed income securities. In times of volatility with rapidly evolving macroeconomic, interest rate, and credit environments, investors should expect premiums or discounts in bond ETFs. Bond ETFs tracking similar benchmarks have experienced large variations in market returns as well.

Fewer inputs can create greater price disparities

Discounts and performance differences reflect the fact that there are two ways to determine portfolio values. In setting end-of-day NAVs, ETF pricing specialists use both actual trades and an adjustment factor based on bid/ask spreads for bonds, especially for bonds that haven’t traded recently. Market prices, in contrast, are collectively determined by ETF investors and “market-makers.” If, as happened in the second last week of March, bond trading is fairly diminished in the underlying market, NAV calculations will have fewer inputs and thus there’s an increased chance for differences from market prices.

Unlike a NAV that’s calculated by a pricing provider, market prices for bond ETFs reflect the market’s minute-by-minute judgment, which includes factors such as:

  • Valuation estimates of the underlying holdings by market-makers.
  • Supply and demand for the ETFs.
  • The cost for providing liquidity in fast-moving markets where underlying bonds may have less liquidity.

Since these calculations have different inputs, investors should expect different outcomes, particularly in volatile markets. When viewed over longer periods — say a month or a quarter — these short-term disparities are generally imperceptible, as they are over a “normal” day or week. Continue Reading…

5 financial benefits of having a healthy lifestyle

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By Morgen Henderson

Special to the Financial Independence Hub

Most of us have been given medical advice to eat healthier and get regular exercise, and there are certainly daily benefits to these choices, like feeling more energetic, having a better mood, and experiencing less pain. But we don’t always consider the financial benefits of a healthier lifestyle.

Although spending more money upfront on things like organic food and gym memberships or other fitness activities might seem like it doesn’t fit into a frugal financial lifestyle, the money you’ll save both in your monthly spending and in the long run makes the initial costs well worth it.

1.) Cheaper insurance later in life

When you get older, you may need life or burial insurance (if you don’t have it already), and being healthy will help you get better rates for your policy. Living in an unhealthy way may lead to health problems down the line. Although it’s still possible to get it, it can be more difficult to get funeral insurance for pre-existing conditions (also known as “final expense” and “burial” insurance). For instance, if smokers need insurance, but they now have lung cancer, it may be hard for them to find a policy, and if they do, it may cost them more.

2.) Lower health care costs

Health care companies often charge higher premiums for people with pre-existing conditions or chronic health problems such as hypertension and diabetes, and sometimes also for smokers. Beyond that, if you have a chronic health condition, you’ll need to pay more out of pocket for prescriptions, doctor visits, and medical treatments. While not all such conditions are preventable through healthy living, many common ones — diabetes, heart disease, certain types of cancers, and osteoporotic hip fractures, to name a few — are.

The World Health Organization found that “physically active individuals in the USA save an estimated $500 per year in health care costs.” That’s based on data from 20 years ago, so savings are even higher today.

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3.) Less spending on filler foods

Choosing whole foods over packaged, processed foods like chips and other snacks means you’re getting more nutrition for your dollars. Changing your snacking habits can help you do this. And adjusting portion sizes to meet what your own body needs will also help shave down your spending on food.

What’s more, cutting out other indulgences many people regularly consume, such as tobacco and alcohol, will save money each year that you can redirect to retirement savings or other investments. Healthier eating habits and reduced substance use will affect your budget now, and your health care costs later. Continue Reading…

7 timeless strategies investors need to remember in this time of market turmoil

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The world as we knew it suddenly changed. What a surprise beyond belief for all of us.

There was no announcement six months ago. There was no new or updated playbook for any of this upheaval.

A harsh pandemic is a sure way of turning lives upside down. Treacherous times are firmly entrenched as the new roadway.

Stock and bond markets march at will in both directions. Investors wonder whether they are closer to a market bottom or to a top. All sorts of fears and worries are sprouting everywhere.

This is a reminder for all to go slow: younger and older, novices and seasoned. Try your utmost to use all the investing common sense you can muster. Sitting on your hands is often a worthy move.

My strategies:

Accordingly, I have selected seven timeless strategies that every investor ought to be familiar with in detail. They form a solid foundation for guiding the family nest egg.

I’ve kept them brief and to the point for the sake of simplicity. Here is my summary of critical strategies:

1). Short term trading is best suited for your “speculative” money. Conversely, long term investing is the best fit for your “serious” money, such as funding retirement. These two portfolios are constructed differently, so don’t mix them.

2). Chasing returns has been far from a consistent winner. Instead, pay attention to acquiring broadly diversified “quality” investments. These portfolios typically fare better during bouts of market turmoil.

3). Set aside the could’ve, should’ve and would’ve schools of hindsight. Make your decisions based on available information and move forward. Looking back in your rear view only creates distractions you can’t do anything about.

4). Becoming attached to your stocks is akin to making emotional decisions. Instead, I recommend pursuing logical moves designed to embrace your best interests. Your investing success should improve.

5). Don’t make investment decision out of fears. Rather, wait until the coast begins to clear. You have absolutely no control over what happens to market fears.

6). Decide whether you seek the return “of” your money, or the return “on” your money. That strategy sheds light on the fit of your desired portfolio. It also keeps you better invested within a more comfortable asset mix.

7). Investing your money all at once is usually not a preferred strategy. Studies show that asset mix delivers the biggest impact on portfolio outcomes. Neither superior stock selection, nor timing of purchases are close seconds.

My premise:

My premise is that investing strategy need not be complicated. I recommend that the main ingredient is always plenty of patience combined with common sense. Focus on logical and sensible approaches that contribute to your discipline. Continue Reading…

Two Way Traffic – a podcast series on cross-border financial issues

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Two Way Traffic is hosted by Elena Hanson (L) and Darren Coleman (R).

By Elena Hanson and Darren Coleman

Special to the Financial Independence Hub

Canadians with assets in the United States and/or family members who are American citizens can face a whole range of complexities when it comes to their financial matters. This can include everything from tax – on both sides of the border – to a myriad of issues concerning an estate, gifting, investments, what have you.

This is what inspired us to develop a unique podcast series called Two Way Traffic. In a nutshell, it’s a give-and-take discussion by two experts who share a great deal of experience: an accountant specializing in cross-border tax, and a wealth-management advisor licensed in both Canada and the United States.

Two Way Traffic, produced by the Acme Podcasting Company, kicked off in January and involves five episodes. Every month we release another one with a different topic.

Through our combined experience, we’ve seen it all, but inevitably a situation arises that presents new challenges. Take the example of a Canadian widow with an account managed by a U.S. trust company. One department of that trust company wanted her to transfer the account because she was in Canada, while another department with the same company said she couldn’t transfer! She then hired a lawyer to effectively have one department argue with the other department: and all at her own cost. The problem could have been avoided altogether if her spouse had sought advice from cross-border experts before he had put this structure in place.

Example: A Canadian IT pro with a California customer

Or take the example of a Canadian IT professional who is incorporated in Canada. This person  works for a California-based customer; some of the work is done out of his home in Canada and some of it is done in the U.S. But here is the problem. The person gets paid in stock options and makes a popular U.S. 83(b) election to pay tax on stock options at grant when the value is low in the hopes of significant appreciation in the future. However, this results in a complete mismatch of Canadian and U.S. taxes at both the personal and corporate levels. As with the other example, if this person had reached out to a tax accountant with cross-border expertise, such a mistake would have been avoided.

Two Way Traffic is just that. It’s not just trucks carrying freight that go across the border every day. It’s also people and – the most complicated commodity of all – money/assets. Our podcast series includes five episodes, each one designed to guide listeners through the complications, implications and advantages of having money and family on both sides of the border.

A million Americans live in Canada

This is a particularly pertinent subject right now. With over one million Americans living in Canada, a booming job market for professionals in both countries, and a new free-trade agreement just signed, the cross-border movement of skilled workers has never been higher. Also, many Canadians have family or property in the U.S. who may not have yet considered the effects of U.S. taxes on their financial plans. This podcast will bring to light those areas of your Canada/U.S. finances where you might be missing something crucial.

For example, the new US-Mexico-Canada trade agreement will impact a lot of people and a lot of companies. With cross-border movement, things can get very murky, and murky is the last thing you want when it comes to determining country of residence, taxes, employment benefits, pensions, and so on.

You have to think about tax residency, which is a very different animal in Canada than it is in the United States. Tax reporting can be complicated if a U.S. person has Canadian corporate ownership. For example, there are different anti-deferral tax provisions that require a U.S. citizen who is a shareholder of a Canadian corporation to recognize corporate income when it is earned and not distributed. Things in Canada are done differently; you are taxed personally when the corporate income is distributed. Bottom line? This can be a major headache for incorporated U.S. citizens who have corporate entities in Canada, or for that matter, anywhere outside the U.S.

Tax reporting can also be complicated if a U.S. person holds such popular Canadian savings vehicles as RESPs and TFSAs. There is also a significant difference between a U.S. person who expatriates by giving up their U.S. nationality, and a Canadian who chooses to become a non-resident of Canada. Continue Reading…

My FP Down to Business podcast on the Crash of 2020 and how to deal with it

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The Financial Post has just published a podcast about the market impact of coronavirus, via a conversation between me and FP transportation reporter Emily Jackson, host of the weekly podcast Down to Business. You can find the full 19-minute interview by clicking the highlighted text: How Coronavirus market chaos compares to 2008. 

While I have been posting almost daily commentaries on the crisis right here on the Hub from various experts, thus far I have refrained from comment myself, but the podcast pretty much covers my views. One thing that came out of the interview was that there may be big generational differences in how this market crash is viewed.

For baby boomers who are retired or thought they were close to it (read “me!”) this crash has been a traumatic experience, especially for those who didn’t pay much attention to risk management and appropriate asset allocation. At our age (I’ll be 67 in a few weeks), we presumably have finished accumulating our nest egg and our time horizon to recoup any losses is shrunken: young people are in quite a different situation: they have less money to lose and have several decades to get it back.

Worried retirees should be at least 50% in fixed income by now

Fortunately, we have been quite conservative: my own advisor has long counselled being somewhere between 50 and 60% fixed income and — having been reminded of the downside risk of the market yet again — I have been selling a few winners where we can find them with the goal of getting our total cash and fixed income to about two thirds of our total portfolio.

We took some profits as the 11-year bull market raged, although of course hardly enough to dodge the storm entirely.  As with most investors, Covid-19 was a “Black swan” that seemingly came out of the blue. I guess I was lulled into believing that the US president would keep the markets aloft at least until he was re-elected, by leaning on the Federal Reserve chairman and various other levers he possesses. Fooled us again, Donald!

Some readers and at least one advisor I correspond with probably think 67% fixed income is too conservative, but that’s right in line with the conservative rule of thumb that fixed income should equal your age. That leaves about a third in (mostly) non-registered stocks, although we also hold US dividend paying stocks in our RRSPs, along with fixed income (bond ETFs and laddered strips of GICs). Our selling inside our RRSP has been more along the lines of selling half of big winners and “playing with the house’s money,” a phrase our daughter has happily adopted too.

Emily Jackson, host of Down to Business; BusinessFinancialPost.com

On the other hand, as I remarked to Emily, it’s much less of a disaster for younger people: in fact, I’d argue it’s almost good news, financially speaking (not of course from a health perspective). Finally, younger investors have an opportunity to buy stocks and equity ETFs at reasonable prices, and at the same time as interest rates fall, they are getting a break — or soon will — on variable-rate mortgages.

Certainly if I were 20 years younger I’d be itching to buy at current prices, although even then I’d keep some powder dry just in case the bargains become even more tempting.

How bad could this get? In yesterday’s FP, David Rosenberg frankly raised the spectre of a depression and total losses in the Canadian market of 50% or more. See It’s time for investors to start saying the D-word — this economic damage could be double 2008.

Too late to ‘revaluate’ your risk tolerance?

A blog the Hub republished on the weekend from Michael James on Money suggested that now is not the time to reassess your risk tolerance. See It’s too late to ‘revaluate’ your risk tolerance. That blog generated a fair bit of discussion on Twitter. Again, this could fall along generational lines. If you believe markets are only half way down and you want some cash to deploy to scoop up bargains at the bottom, then you can sell down some non-registered winners and losers, ideally in equal proportions to make it net tax neutral. Massive up days like Tuesday are an opportunity to do that. Continue Reading…